Inflationary pressure eases

KARACHI: The relative ease in inflationary pressures that began in Q2-FY09 has continued into Q3-FY09 with all price indices exhibiting a declining trend.

Meanwhile, income group-wise inflation during FY09 shows that the highest incidence of inflation has shifted from lower income groups to middle income groups since November 2008. The relative ease in inflationary pressures for the lowest income group can be attributed to declining food inflation, given that staple food accounts for a greater proportion of their total expenditure.

Income group-wise inflation data further reveals that all income groups, except the highest income group (with earnings above Rs12,000), recorded higher inflation incidence than the overall CPI inflation throughout FY09. Signs of easing inflationary pressures are also evident in the decline in persistent component of inflation, which is measured by core inflation.

The Non-Food Non-Energy (NFNE), and 20 per cent trimmed mean, core inflation measures have both shown signs of relative ease since March 2009. A major contributory factor to this was the tight monetary posture of the central bank throughout 2008. The SBP raised its policy discount rate four times during 2008, for a cumulative increase of 500 basis points, taking the discount rate to 15 per cent.

The subsequent improvement in fiscal discipline, and plunge in international commodity prices paved the way for containing excess demand and inflationary expectations. Accordingly, SBP reduced its policy discount rate by 100 basis points to 14 per cent on April 20, 2009. In case of month-on-month (MoM) inflation, all inflation measures have also declined from their peak levels.

Inflationary pressures are likely to continue easing in Q4-FY09. While the annual inflation for FY09 is expected to be well above its annual target of 11 per cent, given that inflation measured by 12 month moving average for April 2009 is still 22 per cent.

Consumer Price Index (CPI): After peaking in August 2008, headline inflation (YoY) declined to 17.2 per cent in April 2009. The recent downtrend in CPI inflation (YoY) was mainly attributed to declining domestic food inflation, principally a reflection of fall in international prices and smooth domestic supply of key staples. Encouragingly, CPI non-food group has also shown signs of relative easing during H2-FY09; however, this decline is not as prominent as in CPI food group.

Going forward, CPI non-food inflation is expected to ease further as lagged impact of tight monetary stance, declining international commodity prices, subdued inflationary expectations amidst weaker domestic demand, and the absence of second-round effects due to a relative slowdown in food inflation.

CPI Food Inflation: After peaking at 34.1 percent in August 2008, CPI food inflation has retreated to reach 17.0 percent YoY in April 2009. This was mainly due to better supply management, as well as a gloomy global scenario for growth and commodity prices.

CPI Non-food Inflation: The uptrend in CPI non-food inflation that started during H1-FY08 witnessed a reversal during FY09 as YoY inflation of the sub-group reached 17.3 per cent during April 2009 against a local peak of 20.2 per cent reached during November 2008.

All sub-indices in the non-food group, except house rent index, have witnessed relative ease in YoY inflation during Q3-FY09. In particular, the transport & communication sub-index has declined at a higher pace as compared to other sub-indices mainly reflecting the impact of downward adjustment in fuel prices and transportation charges, partially responding to the larger decline in international fuel prices.